Objectives
After reading this unit, you should be able to:
l explain the meaning and scope of corporate advisory services;
l identify various corporate advisory services;
l understand the technicalities of the corporate advisory services; and
l appreciate the importance of corporate advisory services.
Structure
11.1 Introduction
11.2 Main Corporate Advisory Services
11.3 Summary
11.4 Self Assessment Questions
11.5 Further Readings
11.1 INTRODUCTION
Corporate advisory services are needed to ensure that a corporate enterprise runs
efficiently at its maximum potential through effective management of financial and
other resources. It also rejuvenates old-line companies and ailing units and guides
existing units in locating areas/activities of growth and diversification. Usually,
Merchant Bankers provide these services. The corporate advisory services represent
an important component of the portfolio of the activities of merchant bankers.
Corporate advisory services, for a business enterprise, include the following services:
a) provide guidance in areas of diversification based on the Government’s
economic and licensing policies,
b) appraising product lines and analyzing their growth and profitability and
forecasting future trends, and rejuvenating old line companies and ailing sick
units by appraising their technology and processes and restructuring their capital
base.
The move to help the ailing industrial units is a well thought out service by the
merchant bankers which remained unattended for years. Now the merchant banks in
India have recognized this gap and started helping ailing companies to overcome their
problems. For example Punjab National Bank has developed special expertise in the
area and contemplates to offer help in this sensitive area in one or more of the
following ways, viz. (i) commissioning of diagnostic studies, (ii) assessment of revival
prospects and preparation of rehabilitation plans, schemes of modernization and
diversification, revamping of the financial and organizational structure, (iii) arranging
approval of the financial institutions/banks for schemes of rehabilitation involving
financial relief etc. assistance in getting soft loans from the financial institutions for
capital expenditure and the requisite credit facilities from the bank, (iv) monitoring of
rehabilitation schemes, and (v) exploring possibilities of takeover of sick units and
assistance in making consequential arrangement and negotiations with financial
institutions/banks and other interests/authorities involved.
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Fee Based Services The above areas are only illustrative of the wide field of corporate advisory services,
which could cover any matter worth the benefit for a corporate unit involving
financial aspects, governmental regulations, policy changes and business
environmental reshuff1es etc. Thus, the scope of the corporate advisory services is
very vast. Its coverage ranges from the subject areas like manageria1 economics,
investment and financial management to corporate Laws and the related legal
aspects.
As a managerial economist a merchant banker has to guide its clients on the aspects
of organizational goals, location of the enterprise, size of the organization and scale of
operations, choice of a product and market survey, forecasting of product, cost
reduction and cost analysis, allocation of resources, investment decisions, capital
management and expenditure control, pricing methods and marketing strategy, etc.
A merchant banker as a financial and investment expert has to guide the corporate
clients in areas covering financial reporting, project measurement, working capital
management, financial requirements and the sources of finance, evaluating financial
alternatives, rate of return and cost of capital, financial rearrangement, reorganization,
mergers and acquisitions.
As an expert in the area of corporate laws a merchant banker should guide on the
legal aspects including the various legal formalities involved in the areas of corporate
finance being raised from the financial institutions, banks and the general public in the
form of loans, new issues of equity or debentures respectively.
3) Corporate Restructuring
The merchant banks provide their expert services for corporate restructuring. When
a company wants to grow or survive in a competitive environment, it needs to
restructure itself and focus on its competitive advantage. This restructuring could be
by way of internal growth or external growth. In simple words, corporate
restructuring is the process by which a company can consolidate its business
operations and strengthen its position for achieving the desired objectives. Corporate
restructuring is done in three different areas. These are:
1) Restructuring at Business Portfolio
2) Financial Restructuring
3) Organizational Restructuring
Restructuring Business Portfolio: In the pre-liberalization era, where license-
permit-Raj existed, Business houses used to try for all sorts of licenses, irrespective
of whether that particular product is fitting into their business portfolio and whether
they have any core competency in producing that product or not. As a result of this
many business houses are rattled with unviable and unrelated business ventures.
After the liberalization the situation has changed and the corporations are forced to
concentrate on their core competencies in order to compete internally and globally.
This had lead many business houses to restructure their Business Portfolios. Business
Portfolio restructuring could be done in a variety of ways like Business Alliances,
Joint Ventures, Mergers, Takeovers, Foreign Franchises, etc.
Financial Restructuring: Financial restructuring aims at designing capital structure
in such a way that it costs least and leaves a major share of the revenue to equity
holders. This also includes planning the liquidity of the company without reducing the
profitability. Traditionally, financial restructuring was meant to restructure debt-equity
mix only. However, now, it includes issues like buy-back of shares, preferential
allotments and issue of warrants.
Organizational Restructuring: This restructuring is needed in order to facilitate
and implement the above two restructurings. The whole restructuring programme
goes waste, if the suitable changes are not made in the organization. These changes
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need to have the cooperation of all levels of employees, only then the restructuring Corporate Advisory
programme will be successful. From above it is clear that in an organization there Services
may be three major areas of restructuring - the mix of the business, the finances and
the organization.
Portfolio Optimization
There are three important decisions to be made - which businesses to retain, which
ones to divest, and how, and which are the new ones, if at all, to enter, and how.
Business Retention Criteria: A variety of criteria for business retention have
emerged from experience and the literature. Some of these have been known for a
long time; tended to be neglected and brought back in a modified, renewed form.
An early criterion was that of distinctive competence. Out of its various strengths, a
firm should focus on those, which gave it an edge over competition. Stay in those
business where one has a competitive edge over existing players and potential new
entrants and can not cope with the bargaining powers of customers and suppliers; the
threat of substitutes and regulatory environment. It has been further buttressed by the
idea of core competence. This is made up of the core skills of a firm, built up over a
number of years.
Divestment Strategies: The above decisions on retention will automatically create
a candid list of businesses for divestment. The process at divestment has to be
handled carefully especially in emerging markets, like India, with many social
concerns:
a) If the business to be divested is already profitable find a suitable buyer at an
attractive price, which can, then, be invested in the core business.
b) If it is losing, break even or low margin, but has, the potential for higher
profitability, find a joint venture partner, hive off and give him equity and
management control, at reasonable price. If the profitability improves, divest
more of the equity at better prices.
c) If the prospects are bleak, or will take too long to turn around, sell to a willing
buyer even at a loss.
d) If a buyer cannot be found, close down, treating all past losses as such costs. Be
guided by the differential, discounted cost benefit analysis.
e) In all the above cases, communicate with employees and unions, keep sharing
information and forecasts, and attempt a consensus. Get the agreement of the
buyer of the business to be divested, or the Joint Venture partner, on taking over
the necessary manpower. Absorb the skilled surplus in the retained business,
with necessary retaining. For the absolute, irreducible surplus, pay appropriate
compensation, with enlightened self-interest.
Diversification Choice: Here also useful need to be retained and renewed. In
emerging markets like India, new industry sectors are being thrown open, for the first
time, for investment by private enterprise. These include core sectors like coal and
aviation; and infrastructure sectors like power, roads, ports and telecommunications.
The concepts of focus and sticking to the knitting perhaps should not be followed
blindly. A new Indian entrant may not have a competitive advantage, but he also does
not have a competitive disadvantage.
Financial Engineering: Three key aspects of the financial model of the firm need
restructuring in the face of the environmental discontinuities of liberalization. These
are - creating value for shareholders; finding the appropriate mix of debt and equity;
and ensuring a competitive cost structure.
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Fee Based Services Shareholders’ Value Creation: Advisors must help companies focus on not just
turnover, gross profits or net profits, but on EPS — Earnings Per Share. This, in turn,
requires optimizing profit after tax, and the number of equity shares. The second
strategy for value creation is, to increase the PE — Price Earnings ratio. To some
extent, a given industry tends to have a certain PE, for a given period, depending on
its prospects. So, management should choose to be in the right industry. Further,
within a given industry, it is possible for a firm to enjoy higher PE. This depends on
the quality of the earnings, arising from the quality of products, processes, brands,
organization and leadership.
Debt-equity Mix: The proportion of equity and debt in the capital structure of a
company also plays a very important role while restructuring. Debt instruments have
committed cash flows in the form of interest payments. Therefore, a firm with little
cash inflows would reduce their debt proportion in the capital structure. Similarly,
equity instruments have the facility of non-dilution of the controlling power. If a firm is
able to generate good returns, the firm may not go for equity as it dilutes their returns
and their control on the company. Therefore, Debt-equity proportion is a very critical
factor in corporate restructuring.
Cost Management: Cost management can be implemented through the following
three steps:
i) Cost Consciousness: Identify and disseminate information on actual costs of
inputs, products, processes, projects and overheads.
ii) Cost Control: Go a step forward by designing and implementing systems of
budgets and standard costs, against which the actual costs can be compared.
iii) Cost Reduction: Further, create systems and climate for continuous cost
reduction, by physically reviewing and challenging the physical and financial
standards themselves.
Organizational Redesign
In parlance, with the business and financial restructuring, the human organization also
needs to be recast. This is needed in both the hardware and software aspects of the
organization: Without the pressures of competition, organizations tend to proliferate
levels, designations, pay scales and manpower. These imbalances reduce human
productivity, creativity and competitiveness. The structures and processes need
change. The organization structure should be critically examined from the point of
view of its ability to respond faster to emerging situations. The organizational
processes need to be strengthened for communication, information sharing,
empowerment, team play and problem solving.
While the right structure, compensation and career growth systems helps in a
turbulent environment healthy organizational culture is required to stay competitive.
The nucleus of culture is the core values. These can be derived, for a particular
organization from the imperatives of meeting its multiple stakeholder’s expectations -
customers, dealers, vendors, shareholders, employees, government and public. Some
common core values are: customer satisfaction/delight; fair dealings; value creation
and innovation.
Activity 1
Why do you think that corporate advisory service be sought before a corporate
restructures its business portfolio?
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4) Capital Structuring and Restructuring Corporate Advisory
Services
Capital structure of a unit is financed by owned capital in the form of promoter’s
contribution and issue of shares and borrowed capital. Net worth represents owned
capital and consists of equity shares and retained profits. Equity share capital, which
is the core capital structure of a company, represents risk capital. Equity shareholders
are the owners of the company, have voting rights, have a say in the management of
the company and possess residuary interest in the company. Equity shares, however,
do not have any right to dividend and the management can skip dividends. The main
questions on the capital structure decision are an appropriate debt equity ratio and
minimizing cost of capital.
Debt-Equity Ratio: The proportion of equity in the capital structure of a company is
determined by the debt-equity ratio stipulated by the Government, the restrictions
imposed by financial institutions and the requirements to be met for listing on stock
exchanges.
Financing Decisions and Cost of Capital: A great deal of controversy has
developed over whether the capital structure of a firm as determined by its financing
decisions, affects its cost of capital. Traditionalists argue that the firm can lower its
cost of capital and increase market value per share by the judicious use of leverage.
However, as the company levers itself and becomes increasingly risky, financial
lenders begin to charge higher interest rates on loans. Moreover, investors penalize
price earnings ratio increasingly, all other things being the same. Beyond a point the
cost of capital begins to rise.
The basic objective behind the capital restructuring services is to “enable projects to
achieve their maximum potential through effective capital structures and suggests
various-strategies-to widen and restructure the capital base, diversify operations and
implement schemes for amalgamations merger or change in business status.
Capital restructuring shall include different steps in different circumstances a client
company is facing. Generally, it may include examining capital structure of the client
company to determine the extent of capitalization. If capitalization is of the reserve by
issue of bonus shares then capital restructuring will include preparing a
comprehensive memorandum to conform to the legal requirements viz. extent of
capitalization of reserve. If the company has excess capital a proposal for buy back
of shares may be prepared. It may cover cases of suggesting mergers, takeovers and
amalgamations involving modernization and diversification of the existing production
systems and the units.
In the capital restructuring the main thrust remains on the analytical side so as to
reincarnate the capital structure ratios, assets restructuring ratios and the debt service
coverage with overall impact on fund generating capacity of the client corporate unit.
5) Loan Syndication
Loan syndication service involves making arrangement for financing a large borrower
by a number of financial institutions. Loan syndication is also known as loan
procurement and project finance service. The main task involved in loan syndication
is to raise the rupee and foreign currency loans with the banks and financial
institutions both in India and abroad. It also arranges to bridge finance and the
resources for cost escalations or cost over-runs.
Broadly, the loan syndication includes the following acts; (a) estimating the total costs,
(b) drawing a financing plan for the total project cost-conforming to the requirements
of the promoters and their collaborators, financial institutions and banks, Government
agencies and underwriters, (c) preparing loan application for financial assistance from
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Fee Based Services term lenders/financial institutions/banks and monitoring their- progress including the
pre-sanction negotiations, (d) selecting the institutions and banks for participation in
financing, (e) follow-up of the term loan application with the financial institutions and
banks and obtaining the satisfaction for their respective share of participation, (f)
arranging bridge finance (g) assisting in completion of formalities for drawl of term
finance sanctioned by institutions expediting legal documentation formalities, drawing
up inter-se agreements etc. prescribed by the participating financial institutions and
banks (h) assessing the working capital requirements, preparing the necessary
application for submission to the bankers and assisting in negotiating for the sanction
of appropriate facilities.
11.3 SUMMARY
Corporate advisory services are needed to ensure a corporate enterprise to run
efficiently at its maximum potential through effective management of finance and
other resources. The main Corporate advisory services include the following services
for a business enterprise namely; Making of Public Issue and Issue Management,
Project Counseling and Pre-Investment Studies, Corporate Restructuring, Capital
Structuring & Restructuring, Loan Syndication, Liaison with Foreign Collaborators
and making preparation for Joint Ventures, Raising Foreign Currency Loans Euro
issues, FCCB’s etc., Mergers and Acquisitions, Making Valuation & Revaluation of
Assets and Consultancy for Rehabilitation of Sick Industrial Units. In addition the
48 services like Help in Management Decisions, Export Staff Placement and HRD Help,
Financial Reengineering, Entrepreneurial Training and Development, Technical Corporate Advisory
Assistance, Quality Control & Product Mix, Market Survey and Research and Tax Services
Planning are also included in corporate advisory services.
Management of public issues of corporate securities viz. equity shares, preference
shares and debentures or bonds is an act involving mobilization of money resources
from the capital market by way of public issues/offers for sale of equity shares,
preference share, debenture or bond etc. Project counseling services relate to project
finance and broadly cover the study of the project and offering advisory assistance on
the project viability and procedural steps for its implementation. Corporate
restructuring is the process by which a company can consolidate its business
operations and strengthen its position for achieving the desired objectives. Corporate
restructuring is done in three different areas namely: Restructuring of Business
Portfolio, Financial Restructuring and Organizational Restructuring. The basic
objective behind the capital restructuring services is to “enable projects to achieve
their maximum potential through effective capital structures and reduce cost of
capital. Loan syndication service involves making arrangement for financing a large
borrower by a number of financial institutions. The service of Liaison with Foreign
Collaborators and making preparation for Joint Ventures involves providing guidance
on negotiating foreign financial and technical collaboration agreements within the
framework of government policies, rules and regulations, assistance in the formation
of corporate ventures in India in collaboration with suitable foreign parties. In the
context of mergers and acquisitions the corporate advisory services includes advice
and assistance in negotiating acquisitions and mergers, the quantum and nature of
consideration and assistance on related legal documentation, official approval, tax
matters, etc, management audits to identify areas of corporate strength and
weaknesses to help formulate guidelines and directions for future growth plans, and
exploratory studies on a global basis, to locate overseas markets, foreign
collaborations and prospective joint venture associates. Corporate advisory services
also include providing help and guidance to the sick industrial units to overcome their
problems through turnaround and rehabilitation strategies.
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Fee Based Services
11.5 FURTHER READINGS
Verma J.C. 1990, Merchant Banking Organisation and Management Tata
McGraw Hill Publishing Company Limited, New Delhi
Verma J.C. 1995, Corporate Mergers Amalgamations & Takeovers, Barat
Publishing House, New Delhi.
Avadhani V.A. 1999, Marketing of Financial Services and Markets, Himalaya
Publishing House, New Delhi.
Bhalla V.K. 2002, Management of Financial Services, Anmol Publications Pvt.
Ltd., New Delhi.
Machiraju H.R. 2003, Merchant Banking, New International Publishers, New Delhi
Bansal Lalit K., 1997, Merchant Banking and Financial Services, Unistar
Publications, Chandigarh.
Nabhi’s Manual of SEBI Guidelines, 2003, Nabhi Publication, New Delhi.
Bharat Manual of SEBI Guidelines, 2003, Bharat Law House Pvt. Ltd., New Delhi.
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